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The enemy within: Betrayal of leaders

Fraud committed by leaders and top executives remains all too common and causes an inordinate amount of damage to organizations around the globe. Here the authors examine one case they investigated and provide tips on how fraud examiners can best approach wrongdoing by those at the upper echelon of the organizational chart.

When an accountant raised questions to his organization’s management in 2016 about the possible manipulation of employee remuneration at an Indonesian mining operation, little did he know that he was pulling the string that would unravel a larger fraud scheme involving top executives. Once discovered, though, the fraudsters’ downfall came quickly.

Some managers had been diverting company funds to their own accounts, and in the process, they withheld payments from some employees. This misbehavior understandably angered the company’s labor union, whose leader threatened industrial action. Management of the mining operation, which was owned by a company listed on the Australia Securities Exchange, couldn’t afford a strike that would disrupt the mining operation, and so the managing director and the chief financial officer of the parent company initiated an investigation.

The authors of this article, with the help of whistleblowers, conducted that investigation on behalf of the parent company to find out more about the suspected fraud inside the mining operation. Here we detail how the fraudulent leaders scammed the company and some of the lessons learned — from this investigation and others that we’ve conducted — about leadership fraud and the importance of the right tone at the top at any organizations wishing to prevent and detect these types of crimes.

We were astonished and bewildered to disentangle an extremely well-organized criminal network formed by none other than the senior managers. The investigation revealed that several senior executives, including a director and a human resources manager, had stolen millions of Indonesian rupia (the equivalent of thousands of U.S. dollars) in a series of brazen schemes involving the misappropriation of redundancy (job severance) and payroll payments.

In one instance, an executive diverted redundancy pay to himself that had been slated for a laid-off employee. And when employees complained about the executive’s actions, he negotiated a loan on behalf of the mining project to repay the funds, potentially leaving the firm on the hook for principal and interest payments.

The fraudsters concealed their skimming of cash advances for personal use through a slush fund by fabricating reconciliation documents, which normally record that money leaving an account matches money spent.

We also exposed schemes that could’ve potentially allowed fraudsters to swindle the company out of millions of dollars with fraudulent supplier contracts, fake companies and false invoicing. Thankfully, the parent company contained the damage after dismissing the three corrupt executives responsible for the fraud. Rather than prosecuting the fraudsters, the company decided to deal with the matter internally. The president director, who was the mastermind behind the scheme and the equivalent of a CEO at the mining operation, confessed to his crimes and returned a portion of the money he’d stolen. While the corrupt director had spent much of the money on a lavish lifestyle and failed investments, he agreed to a payment plan to honor what was still owed to the company. His accomplices also provided information that assisted us in our investigation.

Little of this came to light in public documents or the media because auditors at the time deemed the event immaterial to the publicly listed parent company and irrelevant under Australian law given it took place in Indonesia among locals, and that the amount the fraudsters stole was too small to affect the parent company’s financial numbers, according to an audit report. Even so, the case is a good example of how fraudsters in top positions can easily plunder a company that lacks adequate oversight and controls.

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